Toàn bộ những gì bạn cần để qua môn kinh tế học, tài liệu này tập hợp những câu hỏi trắc nghiệm mới nhất của kinh tế vi mô năm 2018. Về nội dung tài liệu, với các khái niệm phổ biến và khái quát nhất về kinh tế vi mô cũng như những giải thích về các cơ chế hoạt động của nền kinh tế, bộ giáo trình bao gồm 23 phần cung cấp cho người đọc các kiến thức khá toàn diện và chuyên sâu về các nguyên lý kinh tế học như các lý thuyết cổ điển, các lý thuyết về phát triển: nền kinh tế trong dài hạn, các lý thuyết về vòng tròn kinh tế: nền kinh tế trong ngắn hạn, các yếu tố vi mô ẩn sau kinh tế vĩ mô, các tranh luận về chính sách vĩ mô… Tất cả đều được giải thích và đánh giá bởi một vị giáo sư kinh tế hàng đầu trên thế giới. Các khái niệm trong sách được định nghĩa rất rõ ràng, dễ nắm bắt, dễ hiểu, có tóm tắt các chương tạo điều kiện tốt nhất cho việc ôn tập
Chapter 21/The Theory of Consumer Choice ❖ 126 Chapter 21 The Theory of Consumer Choice TRUE/FALSE The theory of consumer choice illustrates that people face tradeoffs, which is one of the Ten Principles of Economics ANS: T DIF: REF: 21-0 NAT: Analytic LOC: Utility and consumer choice TOP: Consumer choice MSC: Definitional A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y ANS: F DIF: REF: 21-1 NAT: Analytic LOC: Utility and consumer choice TOP: Budget constraint MSC: Definitional The slope of the budget constraint reveals the relative price of good X compared to good Y ANS: T DIF: REF: 21-1 NAT: Analytic LOC: Utility and consumer choice TOP: Budget constraint MSC: Applicative A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles that are equally affordable to a consumer ANS: F DIF: REF: 21-1 | 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Budget constraint MSC: Applicative For a typical consumer, most indifference curves are bowed inward ANS: T DIF: REF: 21-2 NAT: LOC: Utility and consumer choice TOP: Indifference curves MSC: Interpretive Analytic For a typical consumer, most indifference curves are downward sloping ANS: T DIF: REF: 21-2 NAT: LOC: Utility and consumer choice TOP: Indifference curves MSC: Interpretive Analytic For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity ANS: F DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Indifference curves MSC: Interpretive When two goods are perfect complements, the indifference curves are right angles ANS: T DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Perfect complements MSC: Interpretive The indifference curves for left shoes and right shoes are right angles ANS: T DIF: REF: 21-2 NAT: LOC: Utility and consumer choice TOP: Perfect complements MSC: Applicative Analytic 10 The indifference curves for perfect substitutes are straight lines ANS: T DIF: REF: 21-2 NAT: LOC: Utility and consumer choice TOP: Perfect substitutes MSC: Applicative Analytic Chapter 21/The Theory of Consumer Choice ❖ 127 11 The indifference curves for nickels and dimes are straight lines ANS: T DIF: REF: 21-2 NAT: LOC: Utility and consumer choice TOP: Perfect substitutes MSC: Applicative Analytic 12 When two goods are perfect substitutes, the indifference curves are right angles ANS: F DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Perfect complements | Perfect substitutes MSC: Interpretive 13 If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant ANS: T DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution | Perfect substitutes MSC: Interpretive 14 The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other ANS: F DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution MSC: Interpretive 15 The marginal rate of substitution between goods A and B measures the price of A relative to the price of B ANS: F DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution MSC: Definitional 16 The marginal rate of substitution is the slope of the budget constraint ANS: F DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution MSC: Definitional 17 The marginal rate of substitution is the slope of the indifference curve ANS: T DIF: REF: 21-2 NAT: Analytic LOC: Utility and consumer choice TOP: Marginal rate of substitution MSC: Definitional 18 At a consumer’s optimal choice, the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Optimization MSC: Interpretive 19 At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio of the marginal utilities equals the ratio of the prices ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Optimization MSC: Interpretive 20 If consumers purchase more of a good when their income rises, the good is a normal good ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Normal goods | Inferior goods MSC: Definitional 21 If a consumer purchases more of good B when his income rises, good B is an inferior good ANS: F DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Normal goods | Inferior goods MSC: Definitional Chapter 21/The Theory of Consumer Choice ❖ 128 22 If a consumer purchases more of good A when her income falls, good A is an inferior good ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Inferior goods MSC: Definitional 23 The income effect of a price change is unaffected by whether the good is a normal or inferior good ANS: F DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Income effect MSC: Interpretive 24 The income effect of a price change is the change in consumption that results from the movement to a new indifference curve ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Income effect MSC: Interpretive 25 The direction of the substitution effect is not influenced by whether the good is normal or inferior ANS: T DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice KEY: Substitution effect MSC: Analytical 26 The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve ANS: F DIF: REF: 21-3 NAT: Analytic LOC: Utility and consumer choice TOP: Substitution effect MSC: Interpretive 27 All points on a demand curve are optimal consumption points ANS: T DIF: REF: 21-3 LOC: Utility and consumer choice TOP: Demand NAT: Analytic MSC: Analytical 28 Economists use the term Giffen good to describe a good that violates the law of demand ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Giffen good MSC: Interpretive 29 Giffen goods are inferior goods for which the income effect dominates the substitution effect ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Giffen good MSC: Definitional 30 Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of Hunan ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Giffen good MSC: Applicative 31 Katie wins $1 million in her state’s lottery If Katie drastically reduces the number of hours she works after she wins the money, we can infer that the income effect is larger than the substitution effect for her ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Labor supply MSC: Interpretive 32 Susie wins $1 million in her state’s lottery If Susie keeps working after she wins the money, we can infer that the income effect is larger than the substitution effect for her ANS: F DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Labor supply MSC: Interpretive 33 A rational person can have a negatively-sloped labor supply curve ANS: T DIF: REF: 21-4 NAT: LOC: Utility and consumer choice TOP: Labor supply MSC: Applicative Analytic Chapter 21/The Theory of Consumer Choice ❖ 129 34 The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope upward ANS: F DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Labor supply MSC: Interpretive 35 The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Labor supply MSC: Interpretive 36 Some economists have advocated reducing the taxation of interest and other capital income, arguing that such a policy change would raise the after-tax interest rate that savers can earn and would thereby encourage people to save more ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Consumption-saving decision MSC: Interpretive 37 A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect ANS: T DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Consumption-saving decision MSC: Interpretive 38 A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect ANS: F DIF: REF: 21-4 NAT: Analytic LOC: Utility and consumer choice TOP: Consumption-saving decision MSC: Interpretive SHORT ANSWER Answer the following questions based on the table A consumer is able to consume the following bundles of rice and beans when the price of rice is $2 and the price of beans is $3 RICE 12 a b c d BEANS How much is this consumer's income? Draw a budget constraint given this information Label it B Construct a new budget constraint showing the change if the price of rice falls $1 Label this C Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this consumer's income increased to $48 Label this D Chapter 21/The Theory of Consumer Choice ❖ 130 ANS: a $24 b c d DIF: TOP: REF: Budget constraint 21-1 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Draw a budget constraint that is consistent with the following prices and income Income = 200 PY = 50 PX = 25 a Demonstrate how your original budget constraint would change if income increases to 500 b Demonstrate how your original budget constraint would change if PY decreases to 20 c Demonstrate how your original budget constraint would change if PX increases to 40 ANS: DIF: TOP: REF: Budget constraint 21-1 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 131 Assume that a consumer faces the following budget constraints a b c d Assuming that income is the same on both occasions, describe the difference in relative prices between Panel A and Panel B If income in Panel B is $126, what is the price of good X? If income in Panel A is $84, what is the price of good Y? Assuming that the price of good X is the same on both occasions, describe the difference in income and price of good Y between Panel A and Panel B ANS: a b c d DIF: TOP: The price of good Y is relatively higher in Panel A than Panel B Said another way, the price of X is relatively lower in Panel A than Panel B $9 $12 Income in Panel A is twice the income in Panel B, and the price of "Y" in Panel B is 1/18 the price of "Y" in Panel A REF: Budget constraint 21-1 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Evaluate the following statement, "Warren Buffet is the second richest person in the world He doesn't face any constraint on his ability to purchase commodities he wants." ANS: Everyone faces scarcity of resources, regardless of how rich they are because wants are assumed to be infinite DIF: TOP: REF: Budget constraint 21-1 NAT: Analytic MSC: Interpretive LOC: Utility and consumer choice List and briefly explain each of the four properties of indifference curves ANS: 1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of something to less of it 2: Indifference curves are downward sloping The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for another If the quantity of one good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy 3: Indifference curves not cross If indifference curves did cross, the same point could be on two different curves, thus contradicting the assumption that consumers prefer more of both goods to less 4: Indifference curves are bowed inward This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have less DIF: TOP: REF: Indifference curves 21-2 NAT: Analytic MSC: Interpretive LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 132 Draw indifference curves that reflect the following preferences a pencils with white erasers and pencils with pink erasers b left shoes and right shoes c potatoes and rice d income and polluted water ANS: DIF: TOP: REF: Indifference curves 21-2 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 133 Graphically demonstrate the conditions associated with a consumer optimum Carefully label all curves and axes ANS: Where M=Income DIF: TOP: Optimization REF: 21-3 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Explain the relationship between the budget constraint and indifference curve at a consumer’s optimum ANS: Since the budget constraint is tangent to the indifference curve at a consumer’s optimum, the slope of the budget constraint (relative market prices) and the slope of the indifference curve (the marginal rate of substitution) are equal at the optimal consumption point DIF: TOP: REF: Consumer choice 21-3 NAT: Analytic MSC: Interpretive LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 134 Assume that a person consumes two goods, Coke and Snickers Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases Carefully label all curves and axes What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates.) ANS: If Coke is a normal good, the consumption of Coke will increase when the price decreases If Coke is an inferior good and the substitution effect dominates, the consumption of Coke will increase when the price decreases If Coke is an inferior good and the income effect dominates, the consumption of Coke will decrease when the price decreases If consumption decreases, the demand curve is upward sloping, and Coke would be a Giffen good Giffen goods are very rare in the real world, and Coke is not likely to be one DIF: TOP: REF: Consumer choice 21-3 NAT: Analytic MSC: Applicative LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 135 10 Using the graph shown, construct a demand curve for M&M's given an income of $10 ANS: DIF: TOP: Demand REF: 21-3 MSC: Analytical NAT: Analytic LOC: Utility and consumer choice Chapter 21/The Theory of Consumer Choice ❖ 187 85 Energy drinks and granola bars are normal goods When the price of energy drinks decreases, the income effect causes a a shift to a lower indifference curve and the consumer buys fewer granola bars b shift to a higher indifference curve and the consumer buys more granola bars c movement along the indifference curve and the consumer buys fewer granola bars d movement along the indifference curve and the consumer buys more granola bars ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 86 REF: TOP: 21-3 Income effect NAT: Analytic REF: TOP: 21-3 Income effect NAT: Analytic REF: TOP: 21-3 Income effect NAT: Analytic A consumer consumes two normal goods, pretzels and Mt Dew The price of Mt Dew rises The substitution effect, by itself, suggests that the consumer will consume a more pretzels and more Mt Dews b fewer pretzels and fewer Mt Dews c more pretzels and fewer Mt Dews d fewer pretzels and more Mt Dews ANS: C DIF: LOC: Utility and consumer choice MSC: Applicative 90 Analytic Assume that a college student purchases only coffee and Snickers bars If both coffee and Snickers bars are normal goods, then the income effect associated with a decrease in the price of a Snickers bar will result in a a decrease in the consumption of Snickers bars and an increase in the consumption of coffee b a decrease in the consumption of Snickers bars and a decrease in the consumption of coffee c an increase in the consumption of Snickers bars and a decrease in the consumption of coffee d an increase in the consumption of Snickers bars and an increase in the consumption of coffee ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 89 NAT: Assume that a college student purchases only coffee and Snickers bars If coffee is an inferior good and Snickers bars are a normal good, then the income effect associated with an increase in the price of a Snickers bar will result in a a decrease in the consumption of Snickers bars and a decrease in the consumption of coffee b a decrease in the consumption of Snickers bars and an increase in the consumption of coffee c an increase in the consumption of Snickers bars and an increase in the consumption of coffee d an increase in the consumption of Snickers bars and a decrease in the consumption of coffee ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 88 21-3 Income effect Energy drinks and granola bars are normal goods When the price of energy drinks decreases, the income effect causes a the consumer to feel richer, so the consumer buys more granola bars b the consumer to feel richer, so the consumer buys fewer granola bars c granola bars to be relatively more expensive, so the consumer buys more granola bars d granola bars to be relatively less expensive, so the consumer buys fewer granola bars ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 87 REF: TOP: REF: TOP: 21-3 NAT: Substitution effect Analytic The income effect of a price change is depicted by a a parallel shift of the budget constraint at the old set of prices b a parallel shift of the budget constraint at the new set of prices c a movement along the budget constraint holding the level of satisfaction constant d not observable and is therefore neither a shift nor a change in the slope of the budget constraint ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-3 Income effect NAT: Analytic Chapter 21/The Theory of Consumer Choice ❖ 188 91 Assume that a college student purchases only coffee and Snickers bars The substitution effect associated with a decrease in the price of a Snickers bar will result in a an increase in the consumption of coffee only b a decrease in the consumption of coffee only c an increase in the consumption of Snickers bars and a decrease in the consumption of coffee d a decrease in the consumption of Snickers bars and an increase in the consumption of coffee ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical 92 21-3 NAT: Substitution effect Analytic REF: TOP: 21-3 NAT: Substitution effect Analytic REF: TOP: 21-3 NAT: Substitution effect Analytic Pepsi and pizza are normal goods When the price of pizza rises, the substitution effect causes Pepsi to be relatively a more expensive, so the consumer buys more Pepsi b more expensive, so the consumer buys less Pepsi c less expensive, so the consumer buys more Pepsi d less expensive, so the consumer buys less Pepsi ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical 96 REF: TOP: Beer and pretzels are normal goods When the price of beer falls, the substitution effect causes a the consumer to feel richer, so the consumer buys more pretzels b the consumer to feel richer, so the consumer buys less pretzels c pretzels to be relatively more expensive, so the consumer buys less pretzels d pretzels to be relatively less expensive, so the consumer buys more pretzels ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical 95 Analytic Pepsi and pizza are normal goods When the price of pizza falls, the substitution effect causes a a shift to a lower indifference curve and the consumer buys less Pepsi b shift to a higher indifference curve and the consumer buys more Pepsi c movement along the indifference curve and the consumer buys more Pepsi d movement along the indifference curve and the consumer buys less Pepsi ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 94 21-3 NAT: Substitution effect Consider a consumer who purchases two goods, X and Y If the price of good Y falls, then the substitution effect by itself will a cause the consumer to buy more of good Y and less of good X b cause the consumer to buy more of good X and less of good Y c not affect the amount of goods X and Y that the consumer buys d result in an upward-sloping demand for good Y if the substitution effect is positive ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 93 REF: TOP: REF: TOP: 21-3 NAT: Substitution effect Analytic Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution? a the budget effect b the preference effect c the substitution effect d the income effect ANS: C DIF: LOC: Utility and consumer choice MSC: Definitional REF: TOP: 21-3 NAT: Substitution effect Analytic Chapter 21/The Theory of Consumer Choice ❖ 189 97 The substitution effect of a price change is depicted by a a movement along the budget constraint holding satisfaction constant b shift in the budget constraint at the old prices c movement along the consumer’s new indifference curve at the new prices d movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 98 21-3 NAT: Substitution effect Analytic Which of the following descriptions best depicts the substitution effect? a the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant b the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant c the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant d the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change ANS: C DIF: LOC: Utility and consumer choice MSC: Definitional 99 REF: TOP: REF: TOP: 21-3 NAT: Substitution effect Analytic If the price of hamburgers increases, the substitution effect works to a decrease the quantity of hamburgers supplied b increase the number of hamburger buns demanded c decrease the quantity of hamburgers demanded d increase the number of hamburger buns supplied ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-3 NAT: Substitution effect Analytic 100 The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution is called the a income effect b substitution effect c Giffen good effect d inferior good effect ANS: B DIF: LOC: Utility and consumer choice MSC: Definitional REF: TOP: 21-3 NAT: Substitution effect Analytic 101 Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes Currently, Emily is spending all of her income on trips to the movie theater If the price of DVDs doubles, the substitution effect will a be two times the income effect b be half the income effect c be zero d always increase the number of trips to the movie theater Emily makes ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-3 NAT: Analytic Perfect substitutes | Substitution effect Chapter 21/The Theory of Consumer Choice ❖ 190 Figure 21-12 102 Refer to Figure 21-12 If the consumer is currently at point A in the figure, a movement to point B as a result of a decrease in the price of potato chips represents the a substitution effect b income effect c budget effect d price effect ANS: A DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 NAT: Substitution effect Analytic 103 Refer to Figure 21-12 If the consumer was initially at point A in the figure, a movement from point B to point C as a result of a decrease in the price of potato chips represents the a substitution effect b income effect c budget effect d price effect ANS: B DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 Income effect NAT: Analytic 104 Refer to Figure 21-12 The shift from point B to point C in the figure is due to the a substitution effect of an increase in the price of potato chips b income effect of an increase in the price of potato chips c substitution effect of a decrease in the price of potato chips d income effect of a decrease in the price of potato chips ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-3 Income effect NAT: Analytic 105 Suppose the price of good X falls and the consumption of good X increases From this we can infer that X is a(n) a normal good b inferior good c Giffen good d None of the above is correct ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 NAT: Demand curve Analytic Chapter 21/The Theory of Consumer Choice ❖ 191 106 A consumer consumes two normal goods, pretzels and Mt Dew When the price of Mt Dew is $0.50 per can, the consumer purchases 40 cans When the price rises to $0.65 per can, the consumer purchases 30 cans We can use the information provided by the consumer’s optimum choices to derive the a demand curve b supply curve c production possibilities frontier d labor-leisure tradeoff ANS: A DIF: LOC: Utility and consumer choice MSC: Applicative REF: TOP: 21-3 NAT: Demand curve Analytic 107 When we derive the demand curve for a good, we should remember that the a income effect must be greater than the substitution effect b substitution effect must be greater than the income effect c substitution effect must be in the same direction as the income effect d income effect and the substitution effect may work in the same or in opposite directions ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 NAT: Demand curve Analytic 108 Given a consumer's indifference map, the demand curve for a good can a be derived by moving a consumer's budget constraint as her income falls b be derived by moving a consumer's budget constraint as her income rises c be derived by moving a consumer's budget constraint as the market price of one good changes d not be derived from consumer theory ANS: C DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 NAT: Demand curve Analytic 109 An individual's demand curve for a good is derived by varying the a income level and observing the resulting total utility derived from both goods b price of one good and observing the resulting quantities of the other good c budget line to the left and calculating the loss in total utility d price of one good and observing the resulting quantities demanded of that good ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive REF: TOP: 21-3 NAT: Demand curve Analytic 110 Consumer theory provides the foundation for understanding demand curves because a each point on a demand curve represents an optimal choice point b consumers purchase more inferior goods than normal goods c increases in income cause the budget constraint to rotate inward along one axis, which changes the consumer’s purchases d increases in income cause the budget constraint to rotate outward along one axis, which changes the consumer’s purchases ANS: A DIF: LOC: Utility and consumer choice MSC: Applicative REF: TOP: 21-3 NAT: Demand curve Sec 04 - The Theory of Consumer Choice - Three Applications MULTIPLE CHOICE We can use the theory of consumer choice to analyze a why most demand curves slope downward b the tradeoff between work and leisure c how interest rates affect household saving d All of the above are correct Analytic Chapter 21/The Theory of Consumer Choice ❖ 192 ANS: D DIF: LOC: Utility and consumer choice MSC: Applicative REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional When a consumer experiences a price increase for an inferior good, it is possible that the income effect is a greater than the substitution effect, and the demand curve will be downward sloping b greater than the substitution effect, and the demand curve will be upward sloping c less than the substitution effect, and the demand curve will be upward sloping d less than the substitution effect but that the substitution effect is positive, and the demand curve will be upward sloping ANS: B DIF: LOC: Utility and consumer choice NAT: Analytic MSC: Definitional A Giffen good is a good for which a a decrease in the price decreases the quantity demanded b the income effect outweighs the substitution effect c an increase in the price decreases the quantity demanded d Both a) and b) are correct ANS: D DIF: LOC: Utility and consumer choice 21-4 Giffen good A Giffen good is a good for which a a decrease in the price decreases the quantity demanded b the substitution effect outweighs the income effect c an increase in the price decreases the quantity demanded d Both a) and b) are correct ANS: A DIF: LOC: Utility and consumer choice REF: TOP: A Giffen good is a good for which a an increase in the price raises the quantity demanded b the income effect outweighs the substitution effect c an increase in the price decreases the quantity demanded d Both a) and b) are correct ANS: D DIF: LOC: Utility and consumer choice Analytic A Giffen good is a good for which an increase in the price a decreases the quantity supplied b increases the quantity supplied c decreases the quantity demanded d increases the quantity demanded ANS: D DIF: LOC: Utility and consumer choice 21-4 NAT: Consumer choice If a good is a Giffen good, then a the supply curve slopes down b the demand curve slopes up c the demand curve is horizontal d there is no optimal level of consumption for the consumer ANS: B DIF: LOC: Utility and consumer choice REF: TOP: REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Analytical When a consumer experiences a price decrease for an inferior good, it is possible that the income effect is a less than the substitution effect, and the demand curve will be downward sloping b greater than the substitution effect, and the demand curve will be upward sloping c less than the substitution effect, and the demand curve will be upward sloping d both a and b are correct Chapter 21/The Theory of Consumer Choice ❖ 193 ANS: D DIF: LOC: Utility and consumer choice 21-4 Giffen good NAT: Analytic MSC: Analytical REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Interpretive REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Interpretive Giffen goods have positively-sloped demand curves because they are a inferior goods with no substitution effect b normal goods with no substitution effect c inferior goods for which the substitution effect outweighs the income effect d inferior goods for which the income effect outweighs the substitution effect ANS: D DIF: LOC: Utility and consumer choice 13 REF: TOP: Violations of the law of demand are assumed to occur a regularly b only when goods are Giffen goods c only when the substitution effect dominates the income effect d All of the above are correct ANS: B DIF: LOC: Utility and consumer choice 12 NAT: Analytic MSC: Analytical A Giffen good is one in which the quantity demanded rises as the price rises because the income effect a reinforces the substitution effect b reinforces and is greater than the substitution effect c counteracts but is smaller than the substitution effect d counteracts and is greater than the substitution effect ANS: D DIF: LOC: Utility and consumer choice 11 21-4 Giffen good Consider the indifference curve map and budget constraint for two goods, beef and potatoes Suppose the good on the horizontal axis, potatoes, is a Giffen good Beef is measured on the vertical axis and is a normal good When the price of potatoes increases, a the substitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes The substitution effect is less than the income effect b the substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes The substitution effect is greater than the income effect c the substitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes The substitution effect is greater than the income effect d the substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes The substitution effect is less than the income effect ANS: D DIF: LOC: Utility and consumer choice 10 REF: TOP: REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional Giffen goods have positively-sloped demand curves because they are a normal goods for which the income effect outweighs the substitution effect b normal goods for which the substitution effect outweighs the income effect c inferior goods for which the income effect outweighs the substitution effect d inferior goods for which the substitution effect outweighs the income effect ANS: C DIF: LOC: Utility and consumer choice REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Definitional Chapter 21/The Theory of Consumer Choice ❖ 194 14 Which of the following statements is not correct? a Reducing taxes on interest income might encourage people to save more b Reducing taxes on interest income might reduce saving c A price increase will create income and substitution effects that will both always work to reduce consumption of the good d Utility is maximized when the marginal rate of substitution between any two goods equals the relative prices of the two goods ANS: C DIF: LOC: Utility and consumer choice 15 NAT: Analytic MSC: Analytical REF: TOP: 21-4 Giffen good NAT: Analytic MSC: Analytical REF: TOP: 21-4 Labor supply NAT: Analytic REF: TOP: 21-4 Labor supply NAT: Analytic The substitution effect of a wage decrease in the work-leisure model results in the worker choosing to a work less than before b work more than before c possibly work more or less than before d work more with a higher level of consumption ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 20 21-4 Giffen good Economic theory predicts that an increase in wages a will cause a wage earner to work more b will cause a wage earner to work less c will cause a wage earner to be more productive d might cause a wage earner to work more or work less ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive 19 REF: TOP: The two “goods” used when economists analyze labor supply are a work and leisure b work and consumption c saving and consumption d leisure and consumption ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive 18 NAT: Analytic MSC: Analytical Which of the following is an example of a Giffen good? a fish in Japan b rice in the Chinese province of Hunan c pork in India d Both a and b are correct ANS: B DIF: LOC: Utility and consumer choice 17 21-4 Giffen good Which of the following is an example of a Giffen good? a potatoes during the Irish potato famine b rice in the Chinese province of Hunan c fish in Japan d Both a and b are correct ANS: D DIF: LOC: Utility and consumer choice 16 REF: TOP: REF: TOP: 21-4 Labor supply NAT: Analytic In the work-leisure model, suppose consumption and leisure are both normal goods The income effect of a wage increase results in the worker choosing to a work less than before b work more than before c possibly work more or less than before d work more than before with a higher level of consumption Chapter 21/The Theory of Consumer Choice ❖ 195 ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 Labor supply NAT: Analytic Scenario 21-2 Fred has recently graduated from college with a degree in journalism and economics He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines Fred is typically awake for 112 hours each week (he sleeps an average of hours each day) For each hour Fred spends writing, he can earn $75 Fred is such a good writer that he can get paid for as many hours of writing as he chooses to work 21 Refer to Scenario 21-2 If Fred decides to spend 80 hours a week playing volleyball on the beach, and the rest of his time writing, how much income will he have available to spend on consumption goods? a $900 b $1,500 c $2,400 d $3,000 ANS: C DIF: LOC: Utility and consumer choice MSC: Applicative 22 Analytic REF: TOP: 21-4 Labor supply NAT: Analytic REF: TOP: 21-4 Labor supply NAT: Analytic When leisure is a normal good, the income effect from a decrease in wages is evident in a a desire to consume more leisure b a desire to consume less leisure c an upward-sloping labor supply curve d a shift in labor demand ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 25 NAT: The labor supply curve may have a backward bending portion because at higher wages the a income effect is smaller than the substitution effect b income effect is larger than the substitution effect c income effect is negative d Any of the above could result in a backward-bending supply curve ANS: B DIF: LOC: Utility and consumer choice MSC: Interpretive 24 21-4 Labor supply Refer to Scenario 21-2 If Fred’s wage increases to $90 per hour of writing, which of the following points would fall on his budget constraint? a 75 hours of leisure, $2,775 of consumption b 80 hours of leisure, $2,400 of consumption c 85 hours of leisure, $2,430 of consumption d 90 hours of leisure, $1,650 of consumption ANS: C DIF: LOC: Utility and consumer choice MSC: Applicative 23 REF: TOP: REF: TOP: 21-4 Labor supply NAT: Analytic NAT: Analytic The substitution effect from an increase in wages is evident in a a decrease in labor demand b desire to consume less leisure c desire to consume more leisure d backward-bending labor supply curve ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 Labor supply Chapter 21/The Theory of Consumer Choice ❖ 196 26 If leisure were an inferior good, then labor supply curves a would all be negatively sloped b would all be positively sloped c would all be vertical d could still be positively or negatively sloped ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 27 REF: TOP: 21-4 Labor supply NAT: Analytic REF: TOP: 21-4 Labor supply NAT: Analytic REF: TOP: 21-4 Labor supply NAT: Analytic Tom experiences an increase in his wages The hours of labor that he supplies to the market would increase if a the income effect is larger than the substitution effect b the substitution effect is larger than the income effect c neither the income effect nor the substitution effect apply to Tom’s labor-leisure tradeoff d Tom views both labor and leisure as inferior goods ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 31 Analytic In the upward-sloping portion of the individual labor supply curve, the substitution effect is a greater than the income effect b less than the income effect c equal to the income effect d exactly offset by the income effect ANS: A DIF: LOC: Utility and consumer choice MSC: Applicative 30 NAT: Suppose that Stacy’s hourly wage increases, and she decides to work fewer hours For her, the substitution effect of the wage change is a only partially offset by the income effect b more than offset by the income effect c exactly offset by the income effect d We not have enough information with which to answer the question ANS: B DIF: LOC: Utility and consumer choice MSC: Applicative 29 21-4 Labor supply A consumer has preferences over consumption and leisure, both of which are normal goods When the wage decreases, the consumer chooses to consume less leisure For this consumer the labor supply curve will a slope upward b slope backward c be horizontal d be vertical ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 28 REF: TOP: REF: TOP: 21-4 Labor supply NAT: Analytic Harry experiences an increase in his wages The hours of labor that he supplies to the market would decrease if a the income effect is larger than the substitution effect b the substitution effect is larger than the income effect c neither the income effect nor the substitution effect apply to Harry’s labor-leisure tradeoff d Harry views both labor and leisure as inferior goods ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 Labor supply NAT: Analytic Chapter 21/The Theory of Consumer Choice ❖ 197 32 Which of the following statements is not correct? a If Jane gets a higher wage and works more, the substitution effect is greater than the income effect for her b If Spencer experiences a wage decrease and works less, the income effect is greater than the substitution effect for him c If the substitution effect is greater than the income effect, the labor-supply curve is upward sloping d If the income effect is greater than the substitution effect, the labor-supply curve is downward sloping ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical 33 REF: TOP: 21-4 Labor supply NAT: Analytic REF: TOP: 21-4 NAT: Analytic Consumption-saving decision REF: TOP: 21-4 NAT: Analytic Consumption-saving decision If the interest rate rises, an individual could choose to a increase consumption when young b increase consumption when old c decrease consumption when young d Any of the above could be correct ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 37 Analytic When considering household saving, the relative price between consuming when young and consuming when old is the a consumption rate b interest rate that individuals can earn on their private savings c prime rate d federal funds rate ANS: B DIF: LOC: Utility and consumer choice MSC: Interpretive 36 NAT: Jake faces tradeoffs between consuming in the current period when he is young and consuming in a future period when he is old Jake experiences a decrease in the current interest rate he earns on his savings Jake will save a less in the current period if the substitution effect is greater than the income effect b less in the current period if the income effect is greater than the substitution effect c more in the current period if the substitution effect is greater than the income effect d more in the current period, regardless of the sizes of the income and substitution effects ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 35 21-4 Labor supply Economic studies of lottery winners and people who have inherited large amounts of money show that a the income effect likely outweighs the substitution effect for most people b the substitution effect likely outweighs the income effect for most people c most people view leisure as an inferior good d most people’s labor supply is unaffected by changes in wealth ANS: A DIF: LOC: Utility and consumer choice MSC: Applicative 34 REF: TOP: REF: TOP: 21-4 NAT: Analytic Consumption-saving decision The substitution effect of an increase in the interest rate will result in an increase in a consumption when young and increase in savings when young b consumption when old and an increase in savings when young c consumption when young and an increase in savings when old d savings when old and an increase in consumption when old ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Chapter 21/The Theory of Consumer Choice ❖ 198 38 Assume that consumption when young and consumption when old are both normal goods The income effect of an increase in the interest rate will result in a an increase in saving when young b an increase in saving when old c a decrease in saving when young d a decrease in saving when old ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Scenario 21-3 Diane knows that she will ultimately face retirement Assume that Diane will experience two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income Diane can earn $250,000 during her working period and nothing in her retirement period She must both save and consume in her work period with an interest rate of 10 percent on savings 39 Refer to Scenario 21-3 Assume that Diane decides to consume $100,000 in the work period How much money will she have available for consumption in her retirement period? a $100,000 b $110,000 c $150,000 d $165,000 ANS: D DIF: LOC: Utility and consumer choice MSC: Applicative 40 REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Refer to Scenario 21-3 If the interest rate on savings increases, a Diane will decrease her savings in the work period if the income effect is greater than the substitution effect for her b Diane will increase her savings in the work period if the income effect is greater than the substitution effect for her c Diane will increase her savings in the work period if the substitution effect is greater than the income effect for her d Both a and c are correct ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 42 21-4 NAT: Analytic Consumption-saving decision Refer to Scenario 21-3 If the interest rate on savings increases, it is possible that a Diane will decrease her savings in the work period b Diane will increase her savings in the work period c Diane will not change her consumption in the work period d All of the above are possible ANS: D DIF: LOC: Utility and consumer choice MSC: Analytical 41 REF: TOP: REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to a decrease his savings rate b increase his savings rate c continue saving at the current rate d Any of the above could be correct ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Chapter 21/The Theory of Consumer Choice ❖ 199 43 Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires When the substitution effect dominates the income effect, an increase in the interest rate on savings will cause him to a increase his savings rate b decrease his savings rate c continue saving at the same rate d Any of the above are possible ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 44 21-4 NAT: Analytic Consumption-saving decision REF: TOP: 21-4 NAT: Analytic Consumption-saving decision One of the primary research results in tax policy analysis over the last 20 years is that a an increase in interest rates will increase saving b an increase in interest rates will decrease saving c lowering taxes on interest income will increase saving d None of the above is correct ANS: D DIF: LOC: Utility and consumer choice MSC: Interpretive 47 REF: TOP: Suppose Olivia is planning for retirement in a two-period world In the first period Olivia is young and earns $1 million, and in the second period Olivia is old and retired and earns nothing The interest rate is initially 10 percent, but then it falls to percent Which of the following statements is correct? a After the interest rate falls, the substitution effect will induce Olivia to consume more when she is young b After the interest rate falls, the substitution effect will induce Olivia to consume less when she is young c After the interest rate falls, the income effect will induce Olivia to consume more when she is young d A change in interest rates affects the substitution effect but not the income effect ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 46 21-4 NAT: Analytic Consumption-saving decision John is planning ahead for retirement in a two-period world When John is young he will earn $1 million, and when John is old and retired he will be given $50,000 from Social Security If the interest rate between the two time periods is percent, what is the slope of John's budget constraint when considering the consumption possibilities between the two periods if consumption when young is graphed on the horizontal axis and consumption when old is graphed on the vertical axis? a -0.89 b -1.05 c -1.07 d -1.12 ANS: C DIF: LOC: Utility and consumer choice MSC: Analytical 45 REF: TOP: REF: TOP: 21-4 NAT: Analytic Consumption-saving decision The opportunity cost of current household consumption is the a wage rate b market interest rate c price of the goods consumed d explicit cost of consumption ANS: B DIF: LOC: Utility and consumer choice MSC: Definitional REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Chapter 21/The Theory of Consumer Choice ❖ 200 48 Suppose that you have $100 today and expect to receive $100 one year from today Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate If you save all your money, how much money will you have one year from today? a $100 b $125 c $200 d $225 ANS: D DIF: LOC: Utility and consumer choice MSC: Applicative 49 21-4 NAT: Analytic Consumption-saving decision REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis Suppose that you have $100 today and expect to receive $100 one year from today Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate Suppose now that the interest rate increases to 40% What happens to the slope of your budget constraint relative to when the interest rate was $25%? The slope a becomes steeper b becomes flatter c doesn't change because the budget constraint shifts in parallel to the original budget constraint d doesn't change because the budget constraint shifts out parallel to the original budget constraint ANS: A DIF: LOC: Utility and consumer choice MSC: Analytical 52 REF: TOP: Suppose that you have $100 today and expect to receive $100 one year from today Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis What is the slope of this budget constraint? a -0.75 b -1.00 c -1.25 d -2.25 ANS: C DIF: LOC: Utility and consumer choice MSC: Applicative 51 21-4 NAT: Analytic Consumption-saving decision Suppose that you have $100 today and expect to receive $100 one year from today Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate Suppose that you borrow $60 and spend $160 today After you repay your loan one year from today, how much money will you have available for consumption one year from today? a $0 b $25 c $50 d $75 ANS: B DIF: LOC: Utility and consumer choice MSC: Applicative 50 REF: TOP: REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis Suppose that you have $100 today and expect to receive $100 one year from today Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate Suppose now that the interest rate decreases to 10% What happens to the slope of your budget constraint relative to when the interest rate was $25%? The slope a becomes steeper b becomes flatter c doesn't change because the budget constraint shifts in parallel to the original budget constraint d doesn't change because the budget constraint shifts out parallel to the original budget constraint Chapter 21/The Theory of Consumer Choice ❖ 201 ANS: B DIF: LOC: Utility and consumer choice MSC: Analytical REF: TOP: 21-4 NAT: Analytic Consumption-saving decision Sec 05 - The Theory of Consumer Choice - Conclusion MULTIPLE CHOICE The theory of consumer choice explains how people choose between a textbooks and energy drinks b labor and leisure c spending now and spending in the future d All of the above are correct ANS: D DIF: LOC: Utility and consumer choice MSC: Applicative REF: TOP: 21-5 NAT: Consumer choice Analytic The theory of consumer choice provides a(n) a literal account of how people make decisions b unrealistic picture of how people make decisions c model that is consistent with how people make decisions d in-depth model that is based more in psychology than in economics ANS: C DIF: LOC: Utility and consumer choice MSC: Applicative REF: TOP: 21-5 NAT: Consumer choice Analytic ... consumer choice MSC: Analytical REF: TOP: 21- 1 NAT: Budget constraint Analytic Chapter 21/ The Theory of Consumer Choice ❖ 142 Figure 21- 1 16 Refer to Figure 21- 1 Which point in the figure showing... MSC: Applicative REF: TOP: 21- 1 NAT: Budget constraint Analytic Chapter 21/ The Theory of Consumer Choice ❖ 143 Figure 21- 2 Pepsi X Z V W Y Pizza 19 Refer to Figure 21- 2 A consumer that chooses... consumer choice MSC: Definitional REF: TOP: 21- 1 NAT: Budget constraint Analytic Chapter 21/ The Theory of Consumer Choice ❖ 147 Figure 21- 4 31 Refer to Figure 21- 4 In graph (a), if income is equal